We all make mistakes: Avoiding the sunk cost fallacy in digital transformation and app modernization

The sunk cost fallacy is a cognitive bias that leads individuals and organizations to continue investing in a failing endeavor simply because they have already put significant resources—time, money, or effort—into it. Instead of making rational decisions based on future potential, businesses become anchored to past investments, fearing that moving on would mean admitting failure.

The term "sunk cost fallacy" originated from economic and psychological research in the mid-20th century and was popularized by Nobel Prize-winning economist Richard Thaler. The concept is closely linked to behavioral economics, which explores how people make irrational financial decisions based on past investments rather than future gains. Closely tied to this is the idea of opportunity cost—the potential benefits missed when one option is chosen over another. When businesses refuse to move on from failing investments, they not only waste resources but also forgo opportunities that could yield far greater returns. This dual effect makes the sunken cost fallacy particularly dangerous in high-stakes decision-making.

A famous example of the sunk cost fallacy is the Concorde project, a supersonic passenger jet developed jointly by the British and French governments. Despite massive cost overruns and clear indications that the project would not be commercially viable, both governments continued funding it for years, unwilling to abandon the investment already made. This phenomenon is sometimes referred to as the "Concorde Fallacy."

Another example of the sunk cost fallacy is companies that hold onto antiquated technology for too long and avoid digital transformation or app modernization. This leads to mounting technical debt, which, if left unchecked, can ultimately cripple innovation and financial sustainability. Too much tech debt can result in operational inefficiencies, security vulnerabilities, and in extreme cases, contribute to a company's downfall—just as excessive financial debt can lead to bankruptcy.

The cost of holding on: implications for businesses

Digital transformation

Many businesses embark on digital transformation initiatives only to hesitate when it comes to abandoning legacy systems. The fear of “wasting” previous investments in on-prem infrastructure or outdated processes leads to half-measures instead of bold, necessary change. Instead of embracing cloud-native solutions, companies end up patching together hybrid approaches that create inefficiencies rather than solving core issues. The result? Slower innovation, higher operational costs, and an inability to fully leverage modern technologies like AI and automation.

App modernization

The software that once served an organization well can quickly become a burden if it is not regularly updated to meet new demands. Yet, many companies resist modernizing applications because of the substantial development costs already incurred and the fear of "will it work?" This uncertainty leads to hesitation, resulting in poor user experiences, security vulnerabilities, and scalability issues. Businesses that fail to modernize their applications risk losing customers to competitors who offer more agile, performant, and secure solutions.

Tech debt

Technical debt accumulates when short-term fixes and workarounds take precedence over long-term scalability and maintainability. The longer an organization avoids addressing tech debt, the more costly and complex it becomes to resolve. However, many businesses continue to invest in maintaining legacy systems rather than refactoring or rebuilding, simply because they have already spent so much on these outdated technologies. This ultimately leads to slower development cycles, frustrated engineering teams, and increased costs in the long run.

The opportunity cost of inaction

The real danger of the sunk cost fallacy is not just the money already spent but the opportunities missed by not moving forward. Businesses that cling to outdated technology risk falling behind in an increasingly competitive market. While they continue to pour resources into maintaining old systems, their competitors are embracing cutting-edge solutions that enable faster innovation, better customer experiences, and greater operational efficiency.

Startups, in particular, often succeed for this very reason. They are willing to take the chances that larger, more established businesses avoid. Their ability to embrace the future without the burden of past investments allows them to remain agile and responsive to market demands. By quickly adopting new technologies and innovative approaches, startups can outmaneuver legacy-driven organizations, securing competitive advantages in rapidly evolving industries.

However, all businesses eventually risk falling into this mindset if they do not actively work to avoid it. The once-agile startup can quickly become the monolithic industry leader that shies away from risk. A recent example of this is the competition between Deep Seek and OpenAI. OpenAI changed the world with AI innovation, but now Deep Seek has forced OpenAI to pivot, proving that even the most innovative companies can become entrenched in their own past investments. Despite having limited money and resources, Deep Seek's willingness to challenge the status quo of AI model training has put pressure on OpenAI to remain adaptable, highlighting how critical it is for businesses of all sizes to continuously embrace change.

How Upsun helps businesses break free

Upsun provides a platform that eliminates the constraints of legacy thinking, allowing businesses to embrace change without the fear of wasted investments.

Flexible cloud-native infrastructure provides businesses with the ability to migrate seamlessly between environments without the risk of vendor lock-in. Unlike traditional infrastructure, which often binds companies to a single provider with rigid contracts and limited adaptability, cloud-native solutions offer the flexibility to scale resources dynamically and integrate with a variety of platforms. This approach reduces operational risk, allowing organizations to remain agile and responsive to market demands. Companies that embrace cloud-native infrastructure gain a competitive edge by avoiding the constraints of legacy systems, ensuring they can rapidly adopt new technologies and optimize performance without being held back by past investments.

Preview environments provide teams with the ability to clone the full stack—including application code, services, and data—allowing for comprehensive testing at all levels. Unlike traditional staging environments that often lack real-world data, these environments enable developers to validate not just functionality but also user experience and performance under real conditions. This significantly reduces the common risks associated with the uncertainty of 'will it work?' by ensuring every component is tested in an authentic scenario before deployment. By catching issues early, teams can confidently roll out modernized applications without the fear of unexpected failures, improving efficiency, security, and overall user satisfaction.

Automate scaling and orchestration to allow your businesses to right-size their resources dynamically, eliminating the need to over-provision for peak demand. This is similar to the infinite hotel paradox—where there is always room for one more guest—except here, resources expand and contract as needed without waste. Companies no longer have to maintain costly idle capacity or scramble to meet unexpected spikes in traffic. Instead, they get the perfect balance: the right resources at the right time, ensuring efficiency, cost savings, and seamless performance without being burdened by past limitations.

With Upsun, companies can pivot both technically and strategically at any moment. Instead of being trapped by past investments, organizations can focus on future growth, adapting to new market demands without unnecessary constraints.

Conclusion

The sunk cost fallacy is a major barrier to innovation in digital transformation and app modernization. Businesses that continue to invest in outdated systems out of fear of losing past investments ultimately pay a higher price in lost opportunities. By embracing a forward-thinking approach with Upsun, organizations gain the flexibility to innovate, scale, and adapt without the weight of legacy systems holding them back.

It's time to stop looking backward and start moving forward. With Upsun, the future is always within reach.